Latin American 'Alibaba' Meli: 'Fake' E-commerce, 'Real' Lending?

In the previous article, Dolphin Research primarily discussed the e-commerce business, which serves as the cornerstone of Mercado Libre, the largest internet company in Latin America, in its coverage study. However, for Meli at present, the other pillar—its financial business—might be more crucial in influencing the company's future growth potential and whether its market value can reach new heights.

Therefore, in this article, Dolphin Research will delve into the company's financial business. In simple terms, the company's financial business consists of two major segments: payments and credit, along with a digital wallet business that lies in between (offering some payment and credit functions). The focus is on how the company strategically positions itself in these industries from a business logic perspective, and what value these businesses bring back to the company.

Detailed Analysis Below:

I. Basic Introduction to the Company's Financial Business

Given the complexity of financial businesses, as a foundation for the subsequent analysis, we will first briefly introduce the general classification and sub-business composition of Meli's financial business, as well as their corresponding monetization and profit-making methods. Dolphin Research believes that broadly, Meli's financial business can be divided into three categories:

1) The first category, payment business, with payment volume as the core business indicator, and revenue generated by charging a certain percentage of the payment amount, can be further subdivided into:

a. Payments generated within Meli's own e-commerce system, for which the company does not charge merchants and consumers extra fees. The payment service fee rate is already included in the commission charged to merchants based on GMV. In other words, this part of the payment nominally does not create any incremental revenue.

b. Payment services for merchants outside Meli's e-commerce system, including other third-party online platforms or offline merchants. This part of the business is monetized by charging a certain payment service fee rate based on the payment amount, reflected in financial service income.

c. If consumers choose "Buy Now, Pay Later" (BNPL, i.e., installment payments), the situation differs. First, the company will charge merchants an additional discount fee (the company advances the full payment to the merchant), whether inside or outside the system. For consumers, under normal circumstances (repaying on time), the "Buy Now, Pay Later" service is also free. However, if consumers are overdue, the unpaid portion will be considered a consumer loan, i.e., part of the credit business, generating interest income.

2) The second category, credit business, with the outstanding loan balance issued by the company as the core indicator, generating income based on the loan amount * corresponding loan interest rate. It can be further subdivided by the target and method of loan issuance: consumer loans, including BNPL and consumer loans; merchant loans, including e-commerce merchants within the system and merchants outside the system reached by payment services; credit card loans, referring to the portion not fully repaid within the interest-free period; and asset-backed loans, currently mainly car loans.

3) The third category is the digital wallet business, which lies between payment and credit businesses, similar to Alipay App in China, allowing users to deposit funds, conduct various transfers, payments, and wealth management functions, most of which are free for users.

Additionally, Dolphin Research has provided a timeline to give everyone a rough understanding of when Meli entered each of these businesses.

II. Payment Business – A Traffic Entry Not Primarily for Profit

1. A Brief Review of the Payment Business Model

First, let's briefly review the business model of the payment business. As shown in the figure below, in the modern payment system, the main participants in payment services include:

a. Merchant Acquirer, directly facing merchants, the front-end department within the entire payment system, which is the main functional segment of Mercado Pago we are discussing. Responsible for customer acquisition, providing merchants with front-end software and hardware tools (such as POS machines), and collecting payment service fees from merchants on behalf of the entire payment system;

b. Card Issuer: Depending on the payment method actually chosen by the consumer (credit card, debit card, or digital wallet), the corresponding card issuer or digital wallet provider is responsible for actual fund management and transfer. It occupies the greatest value in the entire payment chain.

c. Intermediary institutions such as card organizations: Such as Visa/MasterCard and similar clearing institutions like UnionPay, serving as intermediaries linking the "front-end" acquirer and the "back-end" card issuer.

The monetization of the payment industry chain is simply based on charging merchants a certain percentage of the payment amount (termed MDR, Merchant Discount Rate). In formula form, "Payment Service Revenue = Payment Amount * Fee Rate," which can be regarded as the "first principle" of the payment industry, i.e., to obtain more revenue in the payment industry, one must either cover more merchants/scenarios to handle more payment amounts or try to increase the fee rate one can occupy.

2. The Profit Margin of Payments is Not High

The discussion on payment scale will be detailed later, starting with the payment fee rate. As seen above, due to the presence of multiple functional roles in the payment chain, including acquirers, card issuers, and intermediaries, the nominal total payment service fee rate of about 1%~5% leaves only a small portion as profit for the pure acquirer (without other functions) after deducting the share to be distributed to other functional parties, referred to as the net fee rate below.

Still taking the case of using debit card payments in the U.S. as an example, of the 1.25% total payment fee rate, the net fee rate that the acquirer can retain is only about 47bps, accounting for 38% of the total fee rate. The total payment fee rate and the net fee rate that the acquirer can retain will fluctuate depending on the payment method chosen by the consumer. Overall, according to industry practices in the U.S. market, the net fee rate that acquirers can retain generally accounts for 20%~40% of the total fee rate.

In fact, pure acquiring business occupies a low value in the entire payment chain, with net monetization rates generally only in the tens of bps in mature markets, slightly higher in underdeveloped markets like Latin America but generally not exceeding 100bps currently. Compared to other types of internet businesses (e-commerce, ride-hailing, food delivery, etc.) with net monetization rates of at least a few to several tens of percentage points, the profit margin of the payment business is quite low.

This conclusion can also be seen from the financial indicators disclosed by listed companies. Although Meli itself does not separately disclose the profit data of the payment business, among other companies covered by Dolphin Research, over 70% of Shopify's merchant service revenue is payment service income, and its gross margin has fluctuated between 35%~40%+ for many years, compared to other light asset model businesses such as advertising with gross margins of 60% or even higher, the profit margin of the payment business is indeed low.

3. Payment Fee Rates Tend to Decrease Rather Than Increase

Not only is the profit margin of payments low when compared horizontally within the industry, but from a vertical historical perspective, the story of releasing profit margins through price increases does not hold in the payment industry.

The payment industry generally shows a phenomenon where the net monetization rate of the industry and companies gradually declines as the market and companies mature. According to data disclosed by the Central Bank of Brazil, between 2009 and 2018, the net monetization rate for credit card payments decreased from 1.4% to 0.88% (53bps), and for debit card payments, it also decreased by 20bps.

Since 2018, although Dolphin Research has not seen similar industry data, based on the fee rate comparisons disclosed by major acquiring companies, in most cases, the fee rates in 2025 are still lower than in 2022. Overall, payment service fee rates continue to show a downward trend, but the rate of decline has slowed.

1) Homogenized, Tool-Like Business Model Makes Price Increases Difficult

There are many reasons behind the ease of decreasing and difficulty of increasing payment service fee rates, and Dolphin Research emphasizes the impact caused by the business model of the payment industry itself:

a. The tool attribute of payments is very strong, pursuing simplicity, efficiency, and "seamlessness." For this core purpose, payments are not suitable for forming differentiation through "fancy" additional services, thus payments are inherently highly homogenized.

b. As seen from the full payment chain mentioned at the beginning, payment acquiring is essentially a channel business, its main value is to attract merchants, serving as a traffic and business entry point. The actual payment processing function is generally provided by a few shared upstream service providers (Merchant Processor). Moreover, the underlying technology and infrastructure of payments are mostly homogeneous.

Using the U.S. market as verification, the market share of the acquiring industry is quite fragmented, with relatively low barriers to entry (as long as merchants can be attracted). In contrast, the mid-tier payment processing market is quite concentrated, with the top two players occupying more than half of the market share. Therefore, in most cases, acquirers have weaker bargaining power compared to their upstream counterparts.

Since payment acquiring itself is difficult to form significant differentiation, market share is relatively fragmented, and its value and bargaining power in the entire payment chain are relatively low, and how to attract more merchants is its core function. "Price war"—i.e., payment fee rates are evidently the most effective and direct way for merchants to perceive competition in the payment acquiring industry. Even with the marginal decline in costs required to complete payments due to scale efficiency and technological improvements, payment providers are more inclined to pass on this benefit to users to enhance their competitive advantage.

Thus, we can draw two key conclusions about the payment acquiring industry: 1) The payment business cannot rely on continuously increasing fee rates to drive revenue and profit growth, but must follow a "low-margin, high-volume" path driven by covering more merchants; 2) The "channel business" nature of the payment business means that it is difficult for the business itself to have significant profit space, but greater value can be reflected in acquiring more user scale and user data for monetization beyond payments.

4. Growth of Payment Users—Fully Penetrated Within the System

As seen earlier, the growth of the company's payment business is essentially driven by the number of merchants covered. From this perspective, how much room does Mercado Pago have? First, its e-commerce ecosystem merchants and payment activities have been fully penetrated by Pago. The payment amount within the ecosystem has generally grown in proportion to the transaction amount within Meli's e-commerce ecosystem, no longer able to leverage the growth rate of payment amounts within the system through increased penetration rates.

According to disclosures, since the launch of the payment function in 2003, by 2022, the penetration rate of payment amounts within the platform has exceeded 100% (the GMV indicator does not include transaction amounts from non-e-commerce businesses, so GTV/GMV can exceed 100%). In terms of growth rate, it can also be seen that since 2020, the growth rate of GTV within the system has basically aligned with the growth rate of GMV.

Due to the high homogeneity of the payment industry, Dolphin Research has always believed that the core competitive barrier lies in how to cover and bind more users and payment scenarios. Clearly, the company's own e-commerce system provides a basic user and merchant group for its payment business, creating online payment scenarios that cannot be taken away by competitors. This is the foundation for the company to expand other payment and financial businesses.

However, from a future perspective, with merchants within the Meli e-commerce ecosystem already fully penetrated by Pago, the growth of merchants outside the system is evidently a more critical issue.

5. High Growth of Payments Outside the System, but More of an Industry Dividend, Meli Lacks Unique Advantages

Partly due to the natural derivation of online payment functions, and partly due to the anticipation of the platform's internal payment penetration rate nearing its peak, Meli launched mPOS business in Brazil and Argentina in the second half of 2015 and the fourth quarter of 2016, respectively, entering offline payments and began accelerating the growth of payment business outside the system.

According to the company's disclosures, between 2015 and 2024, the proportion of payment amounts outside the system rapidly increased from 16% to 72%, and "coincidentally" around 2020, when the internal payment penetration rate approached 100%, the proportion of payments outside the system just exceeded half, taking over the responsibility of continuing to drive the overall payment amount to maintain high growth.

However, it can also be seen that since 2022, the growth rate of payment amounts outside the system has also started to significantly slow down, from previously high double-digit growth rates to around 30%~40% (of course, still significantly leading the growth rate within the system). Therefore, the next question is, how much growth space does Meli have in payments outside the system?

Further breaking down the composition of payments outside the system, it can be roughly divided into three categories: a. Payments on other online platforms outside the system, b. Payments completed offline by merchants using Meli's mPOS devices, c. Payments completed by consumers using Meli's digital wallet, including QR code payments to merchants, P2P transfers/receipts, utility bill payments, etc. However, only QR code payments are acquiring payments that charge regular payment service fees, while other non-P2B payments have no or only very low fees to cover costs.

According to early company disclosures and sell-side forecasts, since the launch of offline payments (mPOS) and digital wallets, their proportion in payment amounts outside the system has rapidly increased from a combined 30% in 2017 to over 80% in 2022. The proportion of online payments outside the system has declined year by year, with relatively low importance.

Therefore, offline payments and digital wallets with broader usage scenarios are more critical growth directions (after all, the online consumption penetration rate in Latin America is still only around 15%). Additionally, although the chart below shows a larger proportion of digital wallet payments, as mentioned earlier, most of the payment amounts in digital wallets are almost unprofitable non-acquiring payments, serving more as a means of attracting traffic and enhancing user stickiness.

2) So, in the more fragmented and homogeneous offline payment industry, how competitive is Meli? First, due to the relative scarcity of data reflecting the payment industry across the entire Latin American region, we focus on the largest single national market in the region—Brazil.

In terms of industry size, considering only card payments, the overall scale of the Brazilian payment market slightly exceeds BRL 4.1 trillion, corresponding to nearly $760 billion. After the high growth period following the pandemic, the overall growth rate of card payments has fallen back to about 10% in recent years.

In terms of competitive landscape, there are currently five major payment acquirers in the Brazilian payment industry, which can be roughly divided into two categories: a. The first category is acquirers controlled by traditional financial institutions, including Cielo, Rede, and Getnet, whose main investors/controllers are Brazil's leading banks; b. The second category is Fintech acquirers without financial backgrounds, entering the payment industry across sectors, including Meli's Pago, as well as PagBank and Stone.

From the trend of market share evolution shown in the chart below, it is clear that in 2016, the acquiring market was almost monopolized by traditional acquirers with financial backgrounds, with Rede + Cielo alone accounting for about 80% of the market share. However, with the accelerated entry of Fintech payment companies into the market, the combined market share of Pago + PagSeguro + Stone has increased from only 3.5% in 2016 to nearly 30% in 2024. The trend of Fintech payment companies rapidly gaining market share in recent years is very evident.

In terms of the big logic, the main reason Fintech companies can quickly gain market share is the well-known low coverage and service willingness of traditional financial institutions for small and micro merchants, and the high prices of traditional POS machines and other hardware also limit the adoption of these services by small and micro merchants. The entry-level POS machine prices of emerging payment structures like Pago and PagS are only BRL 40, far lower than the traditional POS machines priced at least BRL 200, significantly reducing the entry cost for merchants to use POS services. We will not discuss this in detail.

However, it can also be seen that among the three emerging payment companies mentioned above, Meli's Pago currently has the lowest market share. According to estimates by foreign banks, in 2024, Mercado Pago's payment scale in the Brazilian market is about 60% of the scale of PagS and Stone. Moreover, about 40% of the payment amounts of Mercado Pago mentioned above come from within the system, so if only looking at the scale of payments outside the system, Pago is less than 40% of the scale of its peers.

Furthermore, although Pago's market share and scale in Brazil are still significantly lower, since 2022, Pago's payment amount growth rate in Brazil has not shown a significant advantage compared to its peers. From the results, Meli's impressive growth in the payment business in the past is more due to the market dividend of Fintech payment companies capturing small and micro merchants, without showing a significantly stronger unique advantage than other emerging Fintech payment companies. However, due to the naturally high homogeneity of the payment industry, this situation is not surprising.

III. Credit Business Responsible for Making Money, High Profits and High Risks Coexist

As analyzed above, the pure acquiring business itself does not have much profit space, and its value to the company lies more in reaching more consumers and merchants, especially those outside the system, and sticking to these consumers and merchants through high-frequency usage scenarios of payments.

"Monetization" and "making money" are achieved through two other paths: a. One is to move up the payment chain, from a pure acquirer to the upstream, entering the "card issuer" role that occupies the greatest value in the payment chain, launching digital wallet/electronic account functions and debit/credit cards bound to them; b. The other path is the most "simple and violent" way to make money in financial business, i.e., the credit business.

1. Wallet Business—Also Not for Profit

As mentioned earlier, Meli launched and gradually improved its digital wallet/electronic banking services in 2018, lying between payment and loan businesses. Dolphin Research believes that, similar to payments, the digital wallet is also not primarily for "making money," but its greater value lies in enhancing consumer and merchant stickiness to Meli, and accumulating more merchant and user payment and consumption data for the development of the credit business.

Even, the interest income generated from the floating funds deposited by consumers or merchants into the digital wallet, which can be considered "free" income for financial enterprises, is currently fully returned to users by Latin American digital wallet operators, including Meli, as a means of attracting users.

Additionally, it is worth noting that after the launch of electronic accounts, the company has also launched debit and credit cards bound to the accounts in some markets. Using these bank cards for payments is also free for consumers, (but the company, as the card issuer, can receive a share of payment service income from the merchant acquirer). However, if the loan is overdue, interest fees will be incurred, which is related to the loan business discussed later.

According to the company's disclosures, as of 2Q25, the monthly active users of the company's financial business have reached nearly 68 million, accounting for over 95% of its e-commerce business's quarterly active user base. Among them, according to the company's last disclosure in 4Q23, the scale of digital wallet users was 30 million, accounting for nearly 57% of the overall financial business's monthly active users at that time.

Moreover, due to the stricter criteria for financial active users, if the same criteria are applied, the number of users in the financial business is likely to have surpassed that of the e-commerce business. Although there must be some overlap between the company's e-commerce users and financial users, it cannot be simply understood as all incremental users. However, the active user base of the financial business has exceeded that of the e-commerce business, and logically, the frequency of use of payments and digital wallets is evidently higher than that of e-commerce, which is precisely the "extra value" of the payment and wallet business to the group.

2. Credit Can Indeed Make Money, but There Are Risks

1) Net Interest Margin Exceeds 20%, Lending in Latin America is Indeed "Profitable"

In the previous analysis, we repeatedly emphasized that the monetization and profit-making of Meli's entire financial business segment mainly rely on the credit business. So, how high is the profit space of the credit business, and is it worth the company's "painstaking" efforts to lay the foundation for the credit business through payment and digital wallet businesses?

To answer this question, we need to introduce an indicator used by the company to measure the profitability of its credit business—NIMAL (net interest margin after loss) = the average annualized interest rate of the company's credit business - the company's funding cost - risk/bad debt cost (the company's provision for bad debt losses, generally higher than the actual bad debt amount). From this indicator, although the profit margin of the company's credit business has declined in recent years (due to changes in the composition of the credit portfolio), it still remains as high as about 20%. Once again, this is the net interest margin after deducting funding and bad debt costs, indicating that the lending business in Latin America is indeed highly profitable.

In terms of the absolute value of profit contribution, although the company does not separately disclose the profitability of each segment, by multiplying the aforementioned NIMAL by the corresponding outstanding loan balance, it can be approximately used as the profit of the company's credit business, which was about $1.5 billion in 2024.

From the perspective of the entire group, there are two angles to the profit contribution of the credit business:

a. From a more optimistic, marginal incremental perspective, directly comparing the overall operating profit of the group with the NIMAL profit of the credit business. It can be seen that in 2020, when the profit margin of other businesses had not yet been optimized, the credit business contributed over 90% of the group's overall profit. Even in recent years, as the profit margin of other businesses improved, the credit business contributed about 60% of the group's overall operating profit in the past two years.

This perspective clearly reflects the importance of the credit business to the group's overall profitability. However, this perspective assumes that apart from the bad debt provisions generated by the credit business, the credit business does not share other costs such as marketing, management, and R&D of the group.

b. From a more neutral and fair perspective, comparing the group's overall gross profit after deducting bad debt provisions with the NIMAL profit of the credit business, it can be seen that since 2022, the credit business has consistently contributed slightly over 20% of the group's overall profit. From this perspective, although it no longer contributes more than half of the group's profit, for a business still in its early development stage, the profitability of the credit business is still very high, and as the scale of the credit business grows, the pull effect and space for the group's profitability are quite significant.

2) Credit Card Loans Have Become the Main Growth Driver of the Credit Business

As seen above, the profit space of the credit business in Latin America is indeed considerable, and as long as the loan scale can be expanded, "profits will roll in." So, what is the actual growth situation of the company's loan scale?

According to the company's disclosures, as of 2Q25, the total outstanding loan balance on the company's books was about $9.35 billion, growing over 90% compared to the same period last year, still in a high growth trend.

In terms of structure, according to the company's classification, the loans issued by the company can be divided into four categories: a. Business loans to merchants, b. Consumer loans, including BNPL and regular consumer loans, c. Credit card loans independently split out, d. Asset-backed loans with a small proportion, mainly car loans.

From the latest data, it can be seen that currently, credit card loans are the largest, fastest-growing, and most important sub-category, which echoes the significance of the company's provision of payment and electronic account functions mentioned earlier.

3) Loan Business Driven More by User Growth Than by Average Loan Amount Increase

Further breaking down the reasons for the different performances of the various sub-categories of loans mentioned above, and the factors driving their growth. First, from the average loan size data disclosed by the company, the following points can be seen:

a. The average loan size per user for Meli's various types of loans is relatively low, with the average size of consumer loans and credit card loans ranging from $200 to $400, and even the average size of business loans not exceeding $500, reflecting that the merchants and consumer loan users served by Meli are likely mainly lower-income residents and small and micro merchants not well covered by conventional banks.

b. In terms of trends, apart from the average size of credit card loans showing a clear and continuous upward trend, the average size of business and consumer loans even showed a downward trend, with a trend of bottoming out and rebounding in recent quarters. This means that the growth of Meli's loan business scale is largely driven by the growth in the number of loan users, rather than by an increase in the average loan size. This again verifies the importance of customer acquisition through e-commerce and other financial businesses.

c. The reason behind the once plummeting average size of business loans is mainly due to the limited growth of online merchant loans with higher average loan amounts, while offline merchants with smaller average loan sizes grew more rapidly. This actually reflects one of the reasons behind the poor development of the company's merchant lending business—more mature merchants with more borrowing channels and access to traditional financial institutions do not rely on loans from emerging Fintech institutions like Meli.

In terms of the number of borrowing users:

a. Consumer loans have the largest user base, reaching 20.5 million in 2Q25, accounting for about 1/3 of the company's quarterly active e-commerce buyers. However, this is also because nearly half of consumer loans are BNPL functions used by consumers for online shopping.

b. Although the number of credit card users is still only half that of consumer loans, the growth of credit card loan users is faster, with the user base growing by about 2x from 2Q22 to 2Q25, while consumer loan users only grew by 1x. Combined with the average loan size of credit cards also growing by about 1.4x during the same period, while the average size of consumer loans did not change much, the scale of credit card loans has therefore surpassed consumer loans.

4) Market Share Only 1%, Immense Space, but Credit Cannot Be Entirely Scale-Oriented

In terms of market share and industry scale, according to estimates by a local Brazilian brokerage, looking at the Brazilian market alone, at the end of 2024, the scale of Meli's various sub-categories of loans accounted for only a low single-digit percentage of the total market scale for the corresponding categories, and the combined market share of all categories was only 1%.

This shows that the potential market space for Meli's loan business is very large, and even if the company subsequently captures, for example, 5% of the market share, it would still represent several times the growth space compared to the current situation. Therefore, the growth space for the company's credit business should not be a problem.

However, unlike the light asset payment business, where acquiring larger scale and more users is its main goal, Meli's credit business cannot simply be scale-oriented.

5) Meli's Credit is a Heavy Asset Model with Self-Bearing Risk

The reason Meli's credit business cannot simply pursue scale is that the business model of the company's credit business is that Meli itself acts as the lending entity, bearing the main credit risk and managing funding sources, making it a heavy asset business. Unlike a light asset model where other financial institutions provide funds and bear credit risk, with Meli mainly acting as a channel. The aforementioned outstanding loan balance is all directly reflected on the company's balance sheet as on-balance sheet business (the seemingly low outstanding loan amount on the company's balance sheet is because it excludes already provisioned bad debt losses).

On one hand, this heavy asset model allows the company to earn the full 20%+ net interest margin mentioned earlier, rather than just a channel fee, significantly increasing the profit space of the company's credit business; but on the other hand, it also means the company bears higher credit mismatch risk.

Reflected on the company's balance sheet, it can be clearly seen that as the company's outstanding loan balance rises, the company's borrowings from financial institutions also rise rapidly. It can also be seen that the total amount of loans owed by the company to financial institutions is significantly higher than the company's outstanding loan balance. For example, at the end of 2024, the company's total outstanding loan balance was about $49 billion, but the total amount of loans owed to financial institutions was nearly $58 billion.

This difference reflects that if borrowers cannot repay Meli's loans, this amount will be written off as bad debt losses from the company's receivable loan accounts, but the corresponding amount owed by the company to financial institutions will not decrease at all.

Therefore, unlike domestic e-commerce companies, each of which has "lying" net cash of tens of billions of RMB on their books, Meli not only does not have net cash but also had about $3.8 billion in net debt in 2Q25. This is very rare for an e-commerce company.

Therefore, if risk management gets out of control, the unexpected bad debt losses from the nearly $10 billion loan balance currently managed by the company will put enormous pressure on the company's profitability, balance sheet, and cash flow.

6) A Business with High Returns and High Risks

So, how high is the bad debt risk mentioned above, and how much impact does it have on the company's credit business UE model? Based on the company's disclosed NIMAL, interest income, and bad debt provisions, we constructed the NIMAL composition of the company's credit business.

a. The fundamental reason for the high NIMAL is that loan interest rates in Latin America are very high, calculated based on interest income/outstanding loan balance, Meli's gross loan interest rate is still about 60% even with a recent decline (partly due to the increase in the proportion of credit card loans).

On one hand, this is because the user group served by Meli has relatively poor credit quality. On the other hand, due to high inflation and unstable economic conditions in Latin America, the overall market interest rate is very high. According to data published by the Central Bank of Brazil, the average lending rate in the Brazilian market over the past 10 years has fluctuated in the range of 40%~70%.

b. However, Meli's own funding cost is quite low, comparable to the lending rates in mature markets. According to our estimates, Meli's funding cost has consistently fluctuated in the single-digit percentage range. Therefore, the huge profit space of Meli's loan business fundamentally comes from the extremely high interest rates faced by ordinary consumers or merchants in Latin America, and the low-cost funds that Meli, as a giant company, can obtain in the local Latin American and even global markets, the interest rate spread between the two.

c. In fact, the main cost of Meli's credit business is the provision for bad debt losses. According to our estimates, the annualized proportion of bad debt losses provisioned by the company each quarter currently slightly exceeds 30% (the bad debt losses provisioned by the company will be slightly higher than the actual bad debt amount). The proportion of bad debts over 90 days disclosed by the company has stabilized at around 20% in recent quarters.

Of course, the high bad debt ratio of the company is closely related to the main user group it serves. Since the main service target is low-credit-quality customers not well covered by traditional banks, high bad debt rates are inevitable while enjoying high interest rates.

Fortunately, the extremely high interest rates in Latin America give Meli the space to bear such a high bad debt ratio, and even leave itself with a 20% net interest margin. From this perspective, if the company can improve its credit analysis capabilities and reduce the bad debt ratio in the future, the already high net interest margin of the company can still have considerable room for improvement.

IV. Summary

Summarizing the introduction and analysis of Meli's financial business above, it can be seen that the company's layout in various sub-business lines can be described as mutually reinforcing, each with its own value.

1) Although the payment business is not a profitable business and is highly homogeneous, making it difficult to form effective barriers, Dolphin Research does not believe that Meli can become a significantly differentiated industry leader in merchant payments.

However, the value of payments is not only in payments, its light asset, channel-like business model allows the company to obtain high-frequency consumer and merchant consumption information and the habit of users frequently using the company's financial business without much capital investment and risk. It plays a role in breaking the group's user base out of the e-commerce business and continuously attracting traffic while achieving breakeven or slight profit.

2) In response to the difficulty of making money in the payment business and its value in attracting traffic, the company has strategically derived two better monetization paths. One is to expand from merchant payments to consumer payments—i.e., digital wallet and bank card business. The other is the simplest and most direct credit business.

As seen above, the profit space of the credit business in Latin America is indeed very high (net interest margin exceeding 20%), but growth needs to be driven by more borrowing users and merchants. In terms of customer acquisition, the company's previous layout in e-commerce, payments, and digital wallets can all bring a large number of potential users with low customer acquisition costs to the credit business, helping the company's credit business grow rapidly in a short period.

Considering that the company's market share in both the Latin American payment and lending markets is still very low, if the current flywheel of payment traffic attraction and credit monetization can continue to operate, driving the credit business to continue to grow rapidly. At the same time, if the company can continue to optimize its risk management capabilities and reduce the bad debt ratio, the profit margin of the credit business will also have great room, and its profit elasticity is undoubtedly very large.

In the final article, Dolphin Research will combine the company's e-commerce and financial business revenue and profit prospects to make a valuation and investment logic judgment.

Past [Mercado Libre] Research by Dolphin Research:

Earnings Tracking:

August 5, 2025 Earnings Commentary "Mercado (Minutes): Uncertain About Lowering Free Shipping Threshold in Other Markets"

August 5, 2025 Earnings Commentary "Growth or Profit? The Choice of "Latin American Alibaba" Mercado"

In-Depth Research:

July 10, 2025 "Mercado: The Slow Path to a Trillion-Dollar Valuation for Latin America's "Alibaba"

Risk Disclosure and Statement of This Article:Dolphin Research Disclaimer and General Disclosure